The Bank of Israel is publishing a report about the monetary discussions that took place at the recent meeting headed by outgoing Governor of the Bank of Israel Karnit Flug on October 7-8. The Monetary Committee decided to leave the interest rate unchanged.

The discussions show that the committee members disagreed on whether inflation was high enough to justify raising the interest rate now, or whether they should wait to see whether inflation was firmly established within the target range, as Flug said. The committee members agreed that further strengthening of the shekel was the main risk factor to the level of inflation in Israel and a decision to increase the interest rate.

The Bank of Israel Monetary Committee has six members: Flug, Bank of Israel Deputy Governor Nadine Baudot-Trajtenberg and Market Operations Department Director Andrew Abir, and economics Professors Reuben Gronau, Zvi Hercowitz, and Moshe Hazan.

According to the minutes of the discussions, in contrast to the preceding meeting, at which one member supported an interest rate hike and one other member was undecided, two of the six members supported raising the interest rate to 0.25%.

The two committee members who voted in favor of an interest rate hike said that the committee agreed that the low inflation in Israel did not mean that demand was weak, They added that since inflation had been on an upward trend for some time, the low monetary interest rate did not match the state of the economy. They believe that leaving the interest rate low for a prolonged period was having negative long-term effects, and that the Monetary Committee’s interest rate decision should give more weight to these effects.

These two members argued that raising the interest rate to 0.15% would mean continuation of an expansionary monetary policy, which they believed was consistent with the committee’s future intention.

In the bottom line, the committee members reached different conclusions about the time when it would be possible to raise the interest rate, but agreed that when the interest rate began to rise, the interest rate hikes should be gradual and cautious. “The committee emphasized that beginning to raising the interest rate was contingent on the economic indicators and the degree to which these supported the assessment that the inflation environment had stabilized within the target range. For this reason, the Monetary Committee believes that in each one of the coming interest rate decisions, the interest rate can be raised according to the figures and how the committee members analyze them.”

The next interest rate announcement, which is scheduled for November 26, is the Monetary Committee’s last opportunity to raise the interest rate in 2018, but the probability that this will happen is not high, because the Bank of Israel Research Department revised its forecast for increasing the interest rate, announcing that it expected the first interest rate hike to come only in the first quarter of 2019. The next interest rate decision will be led by Prof. Amir Yaron or Baudot-Trajtenberg, if Yaron’s appointment is not completed by then.

Published by Globes, Israel business news – en.globes.co.il – on October 22, 2018

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